Prices and Decision Making
Jump Start Chapter 6 section 1
1.
Prices perform the allocation function well because they do all of the following :
A.
Provide neutrality, favoring neither the producer or consumer
B.
Provide flexibility, absorbing unexpected shocks
C.
Enable the government to use rationing
D.
Provide ways for consumers to make decisions
2.
All of the following are characteristics of rationing except
A.
Rationing is often viewed as unfair
B.
Rationing creates high administrative cost
C.
Rationing decreases the incentive to work
D.
Rationing provides an efficient link between producers and consumers
In a market economy, a high price is a signal for
A.
Producers to produce more and buyers to buy less
B.
Producers to produce more and buyers to buy more
C.
Producers to produce less and buyers to buy less
D.
Producers to produce less and buyers to buy more
In a market economy, a low price is a signal for
A.
Producers to produce more and buyers to buy less
B.
Producers to produce more and buyers to buy more
C.
Producers to produce less and buyers to buy less
D.
Producers to produce less and buyers to buy more
Economist think of prices as a “system” because
A.
They help buyers and sellers allocate resources between markets
B.
They convey information to the government
C.
They convey information to other countries
D.
They make rationing necessary at times
3.
4.
5.
Price
• The monetary value of a product as
established by supply and demand
• Signals:
– High prices: producers to produce more
and for buyers to buy less
– Low prices: producers to produce less
and for buyers to buy more
Advantages of Prices
• Prices
– help decide: WHAT, HOW, AND FOR WHOM
• Prices are neutral in a competitive market
economy
– Result of competition b/w buyers and sellers:
• More competitive = more efficient price adjustment
process
Advantages of Prices
• Prices are flexible in a market economy
– Think about computers THEN and NOW
– Allows for the “SHOCK” of unforeseen events
and changes in the market
• Prices have no administration cost
– Competitive markets find their own prices
w/out interference
– Prices change from one level to another
gradually
Advantages of Prices
• Prices are familiar and easily understood
– Mommy “I want a candy bar!”
– You “Can I purchase that TV?”
– No ambiguity: if it is $1 then you know you will
pay $1 (plus tax in some states)
– Make quick decisions
– Minimum effort
Allocations Without Prices
• Help us make economic decisions that
“allocate” scarce resources and the
product made from them
• What if the PRICE SYSTEM did not exist?
– Like command economies
– Use another system right?
Allocations Without Prices
• Rationing:
– System where the government decides
everyone’s “FAIR” share
– RATION COUPON:
• Obtain a certain allotted amount
• Widely used during wartime
– Questions of Fairness?
– High Administrative cost
– Diminishes incentives
Price as a System
• Economists favor the price system
• Serve as signals that help allocate resources
between markets
–
–
–
–
–
Oil ($5 to $40 a barrel in 1970’s)
Oil is inelastic
Higher energy cost = less money to spend elsewhere
1ST affected full size automobiles
Gave rebates: a partial refund of the original price of
the product
– Closed plants, laid off workers, started to change to
small production
Price as a System
• Higher prices on oil = shift in productive
resources
• Prices help buyers and sellers allocate
resources b/w markets
• Economist think of the price as a system
– Part of an informational network
– Links all markets in the economy
Jump Start Chapter 6 section 1
1.
Prices perform the allocation function well because they do all of the following Except :
A.
Provide neutrality, favoring neither the producer or consumer
B.
Provide flexibility, absorbing unexpected shocks
C.
Enable the government to use rationing
D.
Provide ways for consumers to make decisions
2.
All of the following are characteristics of rationing except
A.
Rationing is often viewed as unfair
B.
Rationing creates high administrative cost
C.
Rationing decreases the incentive to work
D.
Rationing provides an efficient link between producers and consumers
In a market economy, a high price is a signal for
A.
Producers to produce more and buyers to buy less
B.
Producers to produce more and buyers to buy more
C.
Producers to produce less and buyers to buy less
D.
Producers to produce less and buyers to buy more
In a market economy, a low price is a signal for
A.
Producers to produce more and buyers to buy less
B.
Producers to produce more and buyers to buy more
C.
Producers to produce less and buyers to buy less
D.
Producers to produce less and buyers to buy more
Economist think of prices as a “system” because
A.
They help buyers and sellers allocate resources between markets
B.
They convey information to the government
C.
They convey information to other countries
D.
They make rationing necessary at times
3.
4.
5.
The Price System at Work
Jump Start Chapter 6 section 2
1.
2.
3.
4.
5.
In a competitive market, the adjustment process moves toward market
A.
Equilibrium
B.
Surplus
C.
Shortage
D.
Model
If there is a shortage in a market, the price is likely to
A.
Increase
B.
Decrease
C.
Remain the same
D.
Fluctuate
If there is a surplus in a market, the price is likely to
A.
Increase
B.
Decrease
C.
Remain the same
D.
Fluctuate
The theory of competitive pricing represents
A.
A model by which to measure the performance of other less competitive markets
B.
An important theory in economics
C.
A set of ideal conditions and outcomes
D.
All of the above
An economic model is described by all of the following except:
A.
It is a set of assumptions that can be listed in a table, illustrated with a graph, or
even stated algebraically
B.
It can be used to help analyze behavior
C.
It can be used to predict outcomes
D.
It is usually so complex that is can be understood by economists
The Price Adjustment Process
• Appealing feature of a Competitive Market
Economy
– EVERYONE who participates has a hand determining
PRICES
– Makes prices neutral and impartial
• Buyers and sellers have exactly the OPPOSITE
hopes and desire
– Buyers = find good buys at low price
– Sellers = high prices and large profits
– Neither can get what they WANT so adjustments must
be made
The Price Adjustment Process
• Compromise needs to benefit BOTH
parties
• DEMAND and SUPPLY make a complete
picture of the market
• Price adjustments help a competitive
market reach market equilibrium, with
fairly equal supply and demand
• See figure 6.1
Figure 6.1a
Reflects the LAW OF DEMAND:
Consumers will buy more at
lower prices and less at higher
prices
Reflects the LAW OF SUPPLY:
Suppliers will offer more for sale
at higher prices and less at
lower ones
Represents the supply and demand
sides of the market
Figure 6.1b
Figure 6.1a
SURPLUS= occurs
when supply
EXCEEDS demand
SHORTAGE= occurs
when demand
EXCEEDS supply
Figure 6.1a
EQUILIBRUIM PRICE
= occurs when supply
MEETS demand
Figure 6.1b
Figure 6.1a
SURPLUS= occurs
when supply
EXCEEDS demand
Figure 6.2a
Surplus
• Shows up as UNSOLD products on
suppliers shelves
• Takes up space
• Know that the price is TOO high
• NEED to LOWER the price to attract
buyers
• PRICES tend to go DOWN when there is a
surplus
Figure 6.1a
SHORTAGE= occurs
when demand
EXCEEDS supply
Figure 6.2b
Shortage
• Suppliers have no more product to SELL
• Wished they would have charged a higher
price
• Result = BOTH price and quantity supplied
will go UP
• We do not know how much PRICE will go
up
Figure 6.2c
Figure 6.1a
EQUILIBRUIM PRICE
= occurs when supply
MEETS demand
Figure 6.2d
Equilibrium Price
• “Clears the market” neither a surplus nor a
shortage at the end of the trading period
• Economic Model of the market
– CANNOT know how long it will take to reach
• Price is set TOO HIGH the surplus will
tend to force price down
• Price is set TOO LOW the shortage will
ten to force price up
Explaining and Predicting Prices
• A change in price is the result of a
– Change in Supply
– Change in Demand
– Or BOTH
• Elasticity of Demand is also important
when predicting prices
Explaining and Predicting Prices:
Change in Supply
• What causes change of supply with Agriculture?
– Answer: ____________________________
• See figure 6.3
– SS = curve the farmer predicted
– S1S1 = curve would move to if there was a record
harvest
– S2S2 = curve would move to if there was bad weather
• Food is INELASTIC a small change in supply =
large change in PRICE
Change in Supply
Figure 6.3a
Explaining and Predicting Prices:
Importance of Elasticity
• Demand curve is MORE elastic
• When a given change in supply occurs with an
INELASTIC demand curve
– PRICES change dramatically
• When a change in supply occurs with an
ELASTIC demand curve
– Price change is smaller
• BOTH supply and demand are INELASTIC =
wider change in price
• BOTH supply and demand are ELASTIC = less
change in price
Importance of
Elasticity
Figure 6.3b
Explaining and Predicting Prices:
Change in Demand
• Changes in income,
taxes, prices of
related goods,
expectations, and
number of
consumers
• Example: GOLD
Figure 6.4
The Competitive Price Theory
• The theory of competitive pricing represents a
set of ideal conditions and outcomes; it serves
as a model to measure market performance
• Competitive market allocates resources
efficiently
• To be competitive:
– Sellers are forced to lower prices
– Find ways to keep cost down
• Competition among buyers keeps prices from
falling TOO far
Jump Start Chapter 6 section 2
1.
2.
3.
4.
5.
In a competitive market, the adjustment process moves toward market
A.
Equilibrium
B.
Surplus
C.
Shortage
D.
Model
If there is a shortage in a market, the price is likely to
A.
Increase
B.
Decrease
C.
Remain the same
D.
Fluctuate
If there is a surplus in a market, the price is likely to
A.
Increase
B.
Decrease
C.
Remain the same
D.
Fluctuate
The theory of competitive pricing represents
A.
A model by which to measure the performance of other less competitive markets
B.
An important theory in economics
C.
A set of ideal conditions and outcomes
D.
All of the above
An economic model is described by all of the following except:
A.
It is a set of assumptions that can be listed in a table, illustrated with a graph, or
even stated algebraically
B.
It can be used to help analyze behavior
C.
It can be used to predict outcomes
D.
It is usually so complex that is can be understood by economists